House prices predicted to soar by 7 per cent

House prices look set to increase at more than three times the rate previously predicted this year, an industry body said today.

The Council of Mortgage Lenders said it expected the value of the average property in the UK to rise by 7 per cent during 2006, well up on the 2 per cent it had originally forecast in February.

But it warned that the more buoyant property market was also likely to contribute to interest rates being increased, which would lead to more people falling behind with their mortgages and having their homes repossessed.

The group now expects around 1.2 million properties to change hands this year, up from the 970,000 it had previously predicted.

Mortgage lending is also expected to be more buoyant than it had forecast, with lenders advancing a total of £310 billion during 2006, 9 per cent more than previously thought, while it expects net lending, which strips out redemptions and repayments, to be 25 per cent higher at £100 billion.

The CML still expects the property market to be weaker in 2007 than it is this year, but despite this it has revised up its forecast for house price inflation for the year to 3 per cent from 2 per cent, while it predicts net mortgage lending will total £85 billion, up from the £75 billion it was previously expecting.

But the group is also revising up its interest rate forecasts, and it now expected the cost of borrowing to end both 2006 and 2007 at 4.75 per cent rather than 4.5 per cent.

It warned that higher borrowing costs were likely to feed into modestly higher levels of arrears and repossessions.

It now expects 130,000 people to fall at least three months behind with their mortgage repayments by the end of 2007, 10,000 more than it had previously forecast.

At the same time it thinks about 15,000 people will have their homes repossessed in both 2006 and 2007, compared with its previous estimate of 12,000 in each year.

Jim Cunningham, CML senior economist, said: "The immediate signs are that demand will remain robust over the next few months. But we take the view that confidence and activity are closely associated with interest rate movements and expectations.

"The small rise in short-term interest rates expected in the second half of this year and the rise in fixed-term rates that we have already seen is likely to result in a modest fall in the level of transactions in the second half of this year, and we expect this to continue into 2007."

But he said prospects looked brighter for 2008, when the more benign inflation outlook was expected to lead to lower interest rates.

He said: "This in turn should support demand from home-buyers and buy-to-let investors and result in firmer house price growth."